Lessons from past and outstate economy helping Minn. S&Ls

Minnesota’s savings and loan industry is remarkably healthy, considering the challenges in the housing market during the past couple of years — and the regulatory challenges it could face in the near future.

Only three of Minnesota’s 23 S&Ls showed losses for the first half of 2009, compared to nearly one quarter of all of Minnesota’s banks. And only one S&L is undercapitalized, InterBank, based in Maple Grove. All of the other S&L’s have capital levels well above what regulators typically require.

Two factors are likely to credit for the S&L industry’s relative health in Minnesota. The vast majority of the state’s S&Ls are located in Greater Minnesota, where the housing market has been more stable than in the metro area. Three of the state’s S&Ls are in the metro area, one of them being the troubled InterBank.

“We’re feeling the pinch, but not nearly what they’re feeling in the Twin Cities,” said Paul Mackin, president and CEO of Rochester-based Think Mutual Bank, the state’s largest S&L. “Our home-lending business is growing as much as it’s ever grown.”

The other factor helping the S&L industry is that many of the thrifts still standing after the S&L crisis of the mid-1980s are strong institutions whose management knows how to weather a storm.

“That’s where a lot of these folks come from,” said Tom Welle, chairman of the Minnesota Bankers Association. “Many of them stuck to their organizational mission. They had some struggles for a few years and came back to profitability. That’s why you find today the ones that are still around stuck to their mission of doing home loans.”

Savings-and-loan institutions, also known as thrifts, specialize in savings deposits and making home mortgage loans. By law, thrifts must have at least 65 percent of their loan portfolios in home mortgages and other consumer loans. For some S&Ls, such as InterBank, this focus has made them vulnerable to the housing downturn that started in 2007. InterBank has received two cease-and-desist orders from its regulator, the Office of Thrift Supervision (OTS), in the past year ordering it to shore up its declining capital position and improve other performance measures. In the latest regulatory order, the OTS told the thrift it might have to merge with a another institution, or voluntarily liquidate, if it didn’t get its numbers up.

So far this year, InterBank, which has $775 million in assets, has managed to improve its losses and kept its capital levels steady. It lost $2.1 million for the first six months of 2009, compared to $8.7 million for the same period last year.

InterBank officials could not be reached for comment for this story, but in July, the bank’s president Fred Stelter said first-time homebuyers with nominal down payments and good credit histories created the most problems for the bank.

“This is a story of people losing their jobs coupled with the devaluation of the market,” Stelter said at the time.

Other than InterBank, though, Minnesota’s savings and loans have stayed well-capitalized throughout the real estate crisis. That bodes well for them as they face the possibility of having a new regulator.

Various legislative plans are afoot in Washington, D.C., to merge the OTS with other bank regulators. This could rob S&Ls of a regulatory body that truly understands their mission, said Marshall MacKay, president and CEO of the Independent Community Bankers of Minnesota.

“The more close to home you get, the more your regulator understands your interests,” MacKay said. “We think it’s important that there are options, because a super-regulator would not serve small banks well.”